MCE Holdings is a leading original equipment manufacturer (OEM) and electronics manufacturing services (EMS) provider specialising in the full spectrum of design, manufacture, and supply of automotive electronics and mechatronic parts for the Malaysian and regional markets. It currently has two operational facilities in Johor and Port Klang, Selangor, employing over 500 full-time employees.
Beneficiary of NAP 2020. Launched in early 2020, the NAP aims to make Malaysia a regional leader in automotive manufacturing, engineering, and technology. The NAP sets out three new elements – Next Generation Vehicles (NxGV), Industrial Revolution 4.0 (IR 4.0), and Mobility-as-a-Service (MaaS) – on top of the existing framework to shape the future of the local automotive industry and holistically localise the supply chain. Among the targets outlined in the NAP 2020 are to increase the total production volume (TPV) of vehicles to 1.47m (from 564k in 2018) by 2030, creating various opportunities for volume growth. We believe MCE, which has experience in supplying mechatronic and electronic parts to local automotive players over the years, stands to benefit greatly from the various initiatives under the NAP 2020, and the push for more locally assembled CKD models.
EMS and Tier 1 automotive supplier. Apart from TPV growth, electronic parts and automobile components are also set to grow exponentially in the next decade, driven by monitoring and safety systems, infotainment, and onboard computers etc. As highlighted in the NAP 2020, exports of automotive parts & components are set to reach MYR28.3bn (2018: MYR13bn) by 2030. MCE aims to double the existing floor space at its new plant in Serendah (built-up area of 117k sqft) to cater for new projects and to support its automotive customers in the proximity. There are also opportunities in the growing electronics parts space and as local and foreign car manufacturers look to localise or relocate their supply chains Malaysia or within the ASEAN region. We understand that MCE has managed to enter the supply chain of a major Japanese automotive brand and is looking to expand its capabilities to become a modular supplier.
EV the next growth engine. One of the NAP 2020’s objectives is to develop an NxGV technology ecosystem to make Malaysia a regional hub for the production of NxGV. EVs and autonomous driving are gaining popularity, leading to a surge in demand for various components such as battery packs, battery management system (BMS), converters, switches, sensors, and controllers. MCE has successfully ventured into the EV space with its Manufacture License and World Manufacturer Identifier (WMI) code to assemble emotorcycles in Malaysia. It has also won the contract to produce the LF antennas for electric motocycles’ smart key systems in Indonesia.
Results highlights. Following its turnaround in FY22 (Jul), MCE grew steadily into 1HFY23, with net profit surging four-fold to MYR7.8m on improved margins and economies of scale – on the back of 79% growth in revenue, mainly supported by stronger demand for parts and higher volumes from carmakers.
Balance sheet/cash flow. As of 2QFY23, net gearing was healthy at 0.12x. While proceeds of c.MYR8m from the recently completed private placement should further improve gearing, there may be some loan drawdowns for the construction of a new plant in Serendah. ROE is hovering at mid-teen levels in FY23 as the group continues to grow and improve its profitability.
Dividends. While there is no official dividend policy or consistency in its dividend track record, we believe there is room for dividend payout in FY23 onwards, given the expectation of significantly better profitability.
Management. Dr Goh Kar Chun has been the MD since 2016. Prior to that, he was an executive director since 2008, overseeing the group’s business development, marketing and sales, production, engineering and quality assurance functions. He is supported by executive director/CFO Goh Anne, who is in charge of Finance, HR/Admin and IT, and COO, Lim Chern Tin.
An OEM with R&D capabilities. Moving forward, earnings should grow from strength to strength, supported by contracts to supply electronics and mechatronic components and parts for various car models for Perodua and Proton. The expansion of its capabilities to become a modular supplier instead of a component supplier should also improve client stickiness and margins. The new plant expansion, and additional projects from both new customers and new models should continue to drive growth for MCE, in addition to several pull factors from the supply chain localisation plan under the NAP 2020. Further growth catalysts stem from its EV venture.
Fair value. Pegged to a target 12-14x P/E on FY23F-24F earnings, fair value could range between MYR2.98 and MYR4.08. The target P/E is at a huge discount to its peers in the automotive lighting business and EMS players. We believe MCE will re-rate with steady earnings delivery, structural growth in automotive electronic components, and exposure to the EV space to capture the latest technology trends. Earnings in the automotive industry are generally of better quality thanks to the relatively lower volatility in demand and longevity of the parts (5-10 years). Key risks include escalation of input costs, slower orders, weaker-than-expected TPV.
Source: RHB Securities Research - 16 May 2023
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